Index fund vs. mutual fund for young(ish) children (inheritance, IRA, brokers)
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I'd like to start investing in an index or mutual fund for my children (ages 11 and 13). We would be starting small with only about $200 for each child. We would then invest an additional (lump sum) $200 each year. This money would be staying in the account for a long time (this would be a retirement fund, not a college fund). We are thinking about either VTI or VTSMX.
Does anybody have any recommendations on which would be better (or have a better suggestion altogether)?
Also, knowing nothing about investing, I'd like to know the best way of buying into either an index or mutual fund. All insights are very much appreciated!!
Welcome to the forum. I see this is your first post.
The title of the thread is "Index vs. Mutual Fund" which somehow implies a question about which is better for your situation.
A bit of a digression here. No one can directly invest in an index. All anyone can do is invest in a fund that attempts to mimic the performance of an index. The two main types of funds that attempt to mimic the performance of an index are Mutual Funds and Exchange Traded Funds (ETFs).
There are some technical differences about the back-room mechanics about how ETFs work compared to how Mutual Funds work. At the end of the day, from the point of view of a retail investor like you or me, there is little difference. If you chart the short term or the long term performance of an ETF compared to a Mutual Fund where they both track a specific index (the total market, or the S&P 500, for example) they will be essentially identical.
However, given an index such as the total market or the S&P 500, there are fund vendors who are "high cost" and fund vendors who are "low cost." Low cost is better, obviously. Popular low-cost fund vendors include Vanguard, Schwab, and Fidelity. All fund vendors pay themselves first out of the assets of the fund, which leaves less money in the fund to grow over time. So, look at the "expense ratio".
In addition to being a fund provider, those three companies I listed also are stock brokers. You can open an account at, say, Vanguard and actually buy a Schwab branded fund and vice-versa.
The big distinction between those 3 companies is Vanguard does not have a local branch. All your interactions will be over the internet or over the telephone with Vanguard in Pennsylvania. With Schwab and Fidelity and others, there are retail branches all over the country and possibly near you.
Given the situation you describe, if it were me, I would open an account with a retail brokerage with a local branch that your children could actually visit. A retail presence makes it more tangible for children.
If it were me, I would put put money in VTSMX, which of course is a Vanguard low cost mutual fund. I'm not sure if you can buy into it with a mere $200. If you cannot, then buy VTI and make sure you have the stock broker reinvest all dividends.
The etf VTI has a very low expense ratio and will cost $8.95 per transaction.The same in a mutual fund will probably be more expensive an expense ratio and there is usually a $72.00 fee to buy or sell.
The etf VTI has a very low expense ratio and will cost $8.95 per transaction.The same in a mutual fund will probably be more expensive an expense ratio and there is usually a $72.00 fee to buy or sell.
For example, let's say you open an account at Vanguard (see the commission link above). Vanguard's policy is all trades in Vanguard ETFs and Vanguard Mutual Funds are free. No $8.95 per trade for the ETF or $72 fee to buy or sell a mutual fund. Free. At Vanguard, if you want to buy & sell stocks and non-Vanguard ETFs, there is a small transaction fee that varies based on the size of your account. If you want to buy non-Vanguard mutual funds, some have no transaction fee (NTF) while others have a modest fee.
Given the situation you describe, if it were me, I would open an account with a retail brokerage with a local branch that your children could actually visit. A retail presence makes it more tangible for children.
I learned about this website/wiki from the folks here and it's been very help. Here's some information about ETFs versus mutual funds with some specifics on VTI and VTSMX...
You idea is good. I would look for an online broker with a local office is possible (above suggestion).
Problem is the children can not have an account due to age. Also at 18 or 21 they can do what ever they want with the money.
Since this is for retirement I would look toward setting up an irrevocable trust for them. You would be the trustee. There are probably a lot of options you should be considering so using a good attorney to set up the trust is a must.
An alternative is for you to open the account in your name and at some point in the future make a gift of the account to your children. You should be able to avoid gift taxes by making the gifts over several years if needed. Any income earned would be taxed to you
You idea is good. I would look for an online broker with a local office is possible (above suggestion).
Problem is the children can not have an account due to age. Also at 18 or 21 they can do what ever they want with the money.
Since this is for retirement I would look toward setting up an irrevocable trust for them. You would be the trustee. There are probably a lot of options you should be considering so using a good attorney to set up the trust is a must.
An alternative is for you to open the account in your name and at some point in the future make a gift of the account to your children. You should be able to avoid gift taxes by making the gifts over several years if needed. Any income earned would be taxed to you
My brother did this with his kids, to the extent that the accounts are theirs, but under his control for now anyway. He set up IRA accounts once they began working at his store and has helped them max them out ever since. They will be receiving inheritance money over the next year that they get a percentage of at 25, 30 and 35 years of age. These kids will be set for life if they leave it alone for the next 30 years. The idea of setting up the accounts with Vanguard is a good one, but my bet is you could do this with Schwab as well and they would have a local office to visit. Good luck and good for you for thinking long term.
"In study after study, year after year, it has been shown that the vast majority of actively managed mutual funds underperformed their [benchmark index funds]" -- Jim Cramer
It costs about $10 to place a buy order of any size so you will be paying a 5% commission on just a $200 purchase.
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